Beneath the Niceties, France and Germany Still Disagree

(Stratfor)

It can be difficult to separate the important from unimportant on any given day.
Reflections mean to do exactly that — by thinking about what happened today, we can consider
what might happen tomorrow.

The European Council met in Brussels on Thursday. Unlike several emergency meetings of Europe's leaders this year, this European Council was planned. In this case, it was the agenda that was unexpected — not so much for what was discussed, but for what was not.

This month's European Council had been expected to include discussions about the United Kingdom's EU referendum and the Five Presidents' Report, a document produced in June by Europe's institutions laying out a roadmap for future integration. These topics were delayed to December for various reasons. First, in recent months the inflow of immigrants along the Eastern Mediterranean route have reached such excessive proportions as to make the issue extremely urgent. Second, British Prime Minister David Cameron has been frustrating his European counterparts with a purposefully vague agenda, meaning there is still not much of consequence for the two sides to discuss. But it is the delay of the Five Presidents' Report discussion that proves most interesting, especially considering that the reason given was diverging French and German views on the subject. Reuters quoted a senior EU official as saying Paris and Berlin have had such different views for so long, it would be dangerous to open the discussion now because it would reveal all the differences.

This last sentence is revealing, as its lays bare the truth behind the past three months of European harmony. In another notable European Council summit in July, Europe's leaders gathered to confront Greece and its single-handed rebellion against austerity. July's European Council was successful insofar as Greece's resolve was broken, and in the intervening months its government has begun undertaking the eurozone's desired reforms. But the entire first half of the year, with its confrontation and denouement, was at the same time destructive for the eurozone. Athens' desired alliance against austerity — which would have included France and Italy — did not emerge, but Europe came under great pressure nonetheless. The French and the Italians were in the uncomfortable position of forcing austerity on a peer after arguing against austerity for much of the previous year, while the Germans were in their least favorite role: unpopular hegemon. In the final meeting, Germany made it clear that it had come to terms with the idea of Greece leaving the eurozone, even encouraging it. This was a landmark in the monetary union's crisis.

Coming out of the disruptive Greek experience, which was partly resolved when France argued against Germany to keep Greece within the monetary union, it seems likely that influential players from France and Germany sat down and agreed to jointly enter a period of reinforcing some of Europe's ties — a sort of reaffirmation of the initial marriage vows, with a view to settling things down somewhat. Thus, recent months have been filled with mutual appreciation and displays of friendship. In September, France and Germany's foreign ministers together undertook a trip to Bangladesh and visited what will be the first joint Franco-German Embassy. October saw German Chancellor Angela Merkel and French President Francois Hollande jointly address the European Parliament for the first time since 1989, and they both offered grand speeches about European solidarity and dealing with the Continent's challenges, though neither really offered specifics.

And it is in the specifics, the reality, where problems arise between the two. France and Germany are agreed that Europe is a good thing, and broadly that to avoid going backward it must go forward. These are easy words to say. The problems come when they start to say how. France wants to talk about a joint eurozone budget, and it wants to talk about how the money from this budget will be doled out to the members, ultimately starting a conversation that leads toward the creation of a transfer union from the richer states to the less rich.

Germany, with its giant surplus and net positive investment position, would like to avoid this model. It is happy to talk about a joint budget, but within the subject it is most interested in discussing the enforcement of strict fiscal rules that will bring member states into line, negating the need for a transfer union because all states will be living within their means, just like Germany. To France, whose post-war economic model was largely based on overspending and devaluation, this sounds unpalatable. Thus, both sides are quite clear in how they want to progress, but their visions oppose one another. These are the divisions that the two sides have tried to hide over the past three months, and this is the conversation that has now been put off until December.

However, it is an inevitable conversation, since these issues run deep in Paris and Berlin, and neither will be willing to budge. The growth versus austerity debate, which is an extension of these two key positions, will return once France and Germany feel enough time has elapsed after the Greek storm. In this argument, Germany has had the upper hand since the desperate sovereign debt crisis years of 2011-2012, partly because the pro-growth countries were shamed by their own desperation into toeing the line, and partly because Germany was the one large eurozone economy that was still functioning.

Circumstances are changing. Low oil prices have spurred consumption in the eurozone, and these countries have begun to see their economies grow a little, removing some of their urgency and vulnerability. Instead of an export-driven economy such as Germany's, the indebted periphery is growing along its old path of consumption again. Meanwhile, Germany — so reliant on its exports — may become conflicted. The world economy is entering a slow patch, and German industry needs willing consumers for its products. German leaders may know that allowing the eurozone to inflate its debt further in pursuit of more consumption could lead to a repeat performance of 2008's bust, which has led to Europe's near collapse. But with an election coming up and politically influential industrial leaders greedily exploiting the benefits, the wave may once again be hard to resist. The unsustainable, unbalanced, consumption-led model may return to Europe.

All of this does not bring Paris and Berlin any closer to agreement on a sustainable future model for an integrated Europe, which is the discussion that the Five Presidents' Report was trying to create. Germany is not willing to fund a transfer union, and France does not want to adopt a hard money, austere, low-consumption model in Germany's image. The two are set on a collision course, just as soon as the pleasantries are over.